General Mills, Inc. (GIS)

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General Mills (GIS)

Q1 2013 Earnings Call

September 19, 2012 8:30 am ET

Executives

Kristen Smith Wenker - Vice President of Investor Relations

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

Jonathon J. Nudi - Vice President and President of Snacks Unlimited

Kendall J. Powell - Chairman and Chief Executive Officer

Analysts

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Andrew Lazar - Barclays Capital, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills Fiscal 2013 Results First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, September 19, 2012. I would now like to turn the conference over to Kris Wenker, Vice President, Investor Relations. Please go ahead, Madam.

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jon Nudi, who is President of our U.S. Snacks division. I'll turn the call over to them in just a minute.

First, I've got to cover my usual housekeeping items. Our press release on first quarter results was issued over the wire services earlier this morning and is also posted on our website if you need a copy. We've posted slides on our website, too, that supplements today's prepared remarks. These remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

And one last note for me, we provided a data page with historical sales and growth rates for our newly organized U.S. Retail division and International region. You can find that data page under the Investors section of our website.

And so with that, I'll turn you over to my colleagues, starting with Don.

Donal Leo Mulligan

Thanks, Kris, and hello, everyone. Thank you for joining us this morning.

Slide 4 summarizes our results for the quarter. Sales totaled $4.1 billion, up 5%, and segment operating profit increased 6% to $769 million. These results were led by our International segment, including contributions from acquired businesses. Net earnings totaled $549 million, and diluted earnings per share were $0.82 as reported. These results include a net increase in the mark-to-market valuation of certain commodity positions in grain inventories, along with the one-time tax benefit and restructuring charges. Excluding these items affecting comparability, our adjusted diluted EPS would be $0.66. This was a bit better than we planned, thanks to strong international performance that benefited operating profit and contributed to a lower underlying tax rate.

Slide 5 shows the components of our net sales growth. On an as-reported basis, net sales increased 5%, with growth driven by acquisitions. Pound volume contributed 9 points of growth in the quarter, sales mix and net price realization subtracted 2 points of sales growth, and foreign exchange also reduced net sales by 2 points. Excluding acquisitions, net sales were 1% below year-ago levels as reported and up 1% in constant currency.

Slide 6 details net sales performance for our newly organized U.S. retail divisions. In total, net sales declined 1%, including the impact of merchandising spending to support new item launches and sharper price points on certain established products. Pound volume was 2% lower in the quarter. This was a sequential improvement from the previous quarter, and it included steady improvement through the last 3 months.

Sales for our Bakeries and Foodservice segment declined 2% in the first quarter. Pound volume was up 2%, but that growth was offset by negative price realization mix. Hot breakfast items, snacks and baking mixes led our sales performance in the quarter.

As shown on Slide 8, our first quarter international net sales grew 36% on a constant currency basis, with growth across all 4 regions. In Canada, sales increased 28%, including the acquired Liberté yogurt business. Sales for the region combining Europe, Australia and New Zealand increased 51%. This top line performance reflects the addition of Yoplait International and good gains by Nature Valley in the U.K., Häagen-Dazs in France and Old El Paso in Australia. Sales in the Asia-Pacific region increased 20%, led by China. In the Latin America, constant currency sales increased 20%. This was before Yoki, which will begin contributing to General Mills' sales and operating profits in our second quarter. Excluding acquisitions, international constant currency sales increased at an 8% rate in Q1.

In the first quarter, our underlying gross margin declined 40 basis points to 38.2%. This excludes the impact of mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods. The addition of Yoplait International accounts for the majority of the underlying gross margin decline. The remainder reflects higher input cost. And while grain costs have gone up this summer, we're still estimating 2% to 3% inflation for General Mills in fiscal 2013, well below last year's 10% inflation rate, and we're now roughly 75% covered on our commodity needs for the fiscal year.

Slide 10 shows our first quarter operating profit growth split up by segment. U.S. Retail profit was 2% below year-ago levels, nearing the volume trend. Advertising expense was down 13% in the quarter as our marketing spending was weighted towards promotional activity this period. International profit increased 56%. That includes incremental contributions from Yoplait and a 17% increase in advertising spending. Excluding acquisitions, profit still increased at a double-digit rate. Bakeries & Foodservice profit grew 10% in the quarter, reflecting pound volume growth and higher grain merchandising earnings.

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